Tenant Screening 101
MartelTurnkey clients don’t have to worry about screening tenants, at least not directly. We find the property, renovate it, place a tenant in, and put the rental under property management. Most of our clients never even see their investment property, let alone meet the tenant. Our job is to provide all the resources necessary for them to do that with ease.
Still, a rental property is a significant investment. Landlords depend on careful tenant screening to keep the asset in the black. You should have at least some idea of how to screen a tenant properly.
So let’s look at some quick-and-dirty tenant-screening dos and don’ts. If you ever want to change property managers or hire a property manager yourself, you will at least know what to ask them about their tenant-screening process.
Do Verify Income
Consistent income is the best predictor of whether or not a tenant will meet his/her rent obligations. Smart landlords and property managers don’t rely on “don’t-ask-don’t-tell” — they take the time to verify exactly what the prospective tenant does for a living.
Verifying employment or self-employment income is the most common hurdle, but some tenants may have dependable benefits, investment income, or annuities. Ask for documentation of everything. When verifying employment, 2-3 years’ history at the same job is ideal; the bare minimum is the last 3-4 pay stubs or income statements.
How much income is enough? Three times the rent in pre-tax income is the rule of thumb, but some managers are more stringent, and lower-income properties may benefit from targeting a lower multiple.
Do Check Rental History
So many evictions, slow-payers, and non-payers can be avoided by checking to see if the prospective tenant has been evicted in the past, or whether they were consistently behind on their rent in the past.
People who pay their rent religiously with few or no complaints from their last landlord tend to repeat the same behavior with the next landlord. It’s not a guarantee, however. Job losses and other emergencies can still arise, but the consistent rental payment history is a good sign, and easy to check.
Do Check Credit
The credit reports and scores compiled by major credit bureaus contain a record of every American’s payment and debt history.
A look at a prospective tenant’s credit score will tell you several important things, including:
– Whether or not the prospect has a history of missing payments.
– Whether or not the prospect is overburdened with debt, to the point that they might struggle to make the rent even with robust, stable income.
Evictions, foreclosures, court judgments, and bankruptcies may also show up on a credit check.
Do Check Criminal Background
You don’t want a tenant with a serious criminal background. Recidivism rates on past offenders are depressingly high. You can’t collect rent from a tenant who has been hauled off to jail — and if the tenant is on probation, it doesn’t take much for them to be back in the same place.
Even if the tenant never re-offends, felons have a hard time finding new jobs if they lose them. At the darker end of the spectrum, you don’t want your tenant running a criminal enterprise out of your property. You could actually be held liable.
In some neighborhoods and markets, a completely clean criminal record may be hard to come by. However, good property managers at least put policies in place to reject tenants with high-risk criminal backgrounds — e.g. violent offenses, sex crimes, theft and burglary.
Don’t Break the Law
Federal, state and municipal laws apply to tenant-landlord relations. Obviously, you are not allowed to discriminate by race, sex, and family or parental status (although you may be able to restrict larger families by setting occupancy limits).
State and local rules may also apply to how much information you can legally gather from a prospective tenant, as well as how high of an application fee you can charge. Trust me, you don’t want to be sued for abusive tenant screening practices. Do it by the book.
Don’t Follow Your Heart
Don’t be charmed by a sweet disposition, a pretty face, or a charming story. You’re looking for a tenant, not a spouse. A tenant with a dreadful personality may be a pain in the rear, but overall it doesn’t matter how much you personally like or despise your tenant, as long as the rent is paid on time and the tenant doesn’t cause too many headaches.
Don’t Ignore Your Gut
It’s great to follow a systematic process of tenant screening, but gut instinct also plays a role. A classic example is a tenant who can’t verify their employment.
“This is stupid! I have the money!” Every property manager hears this at some point. But look past any big bank balances — how did the tenant get the money? If it’s dubious, you may want to reconsider.
Don’t Be Swayed By Sob Stories
Many self-managing landlords form too close a relationship with their tenants. They may be swayed by tales of job loss, cruel ex-spouses, medical conditions … a million and a half reasons why the rent is late, and could you please just make another exception? It will be on time next month, cross my heart!
You are running a business, not a charity. You don’t have to be a monster, but most tenants don’t realize the difficulty they put their landlords through. Many assume their landlords are rich, and they may use this assumption to justify manipulative behavior.
Bottom line, though — everyone has to pay their rent or risk losing the roof over their head. Keep tenants at an arm’s length, set policies, and be prepared to enforce them — up to and including filing for eviction.
Don’t want to bother with any of this? Remember, MartelTurnkey properties come ready-made with the tenant and property manager already in place. You will never have to see the property or the tenant if you don’t want to. All you see are the cash flow checks. Reach out to us today to find out how we do it!